CBRT Market Participants Survey: Repo rate expectations highlight the tension in the lira

Although there is a slight increase in inflation expectations as of the end of the current year, this issue is also important in terms of how far the Central Bank can raise interest rates, especially when 12-month expectations are taken into account. Therefore, in fact, expectations in inflation will also send signals to the market about the Central Bank's terminal interest rate. As of summer, we will see that the inflation pass-through of exchange rates increases with the deactivation of the base effect and additional factors. This situation will manifest itself especially in imported goods and input categories, and will bring upward price pressure on fuel, energy input and durable consumer goods.

Although the prices of services are rigid due to demand, the constraints that the tight monetary policy will impose on consumption may create some balancing. On the other hand, both market prices and deferred hike effects can be seen in public services. We have to evaluate the inflation effects of the minimum wage increase on demand and operating costs as of July. We consider the demand-driven effects as lagged and see the short-term effects on inflation as upwards at exchange rates.

According to the average inflation forecasts for the next 12 and 24 months, inflation is expected to be 30.65% (May: 29.84%) and 18.1% (May: 17.7%), respectively. Thus, the average of inflation expectations for the next 12 and 24 months became 24.39%. Inflation expectation after 5 years was 8.07% (May: 8.22%).

Forward CPI expectations… Source: CBRT, Dinamik Yatırım

Interest rate expectations in the Repo and Reverse Repo Market were 18.13% for the end of the month. The market predicts the one-week repo rate, which is the policy rate of the Central Bank, as 17.56%, 21.65, 19.30 and 13.45% in the current month and 3, 12, and 24 month future expectations, respectively.

A very strong increase in the benchmark interest rate is expected next week. As steep as these expectations may be, they will leave a significant gap to be bridged between the policy rate and the one-month deposit rate, which is currently around 27%. Alternatively, the monetary authority could try to distribute the burden of the final increase between this month and the next policy meeting, allowing policymakers to assess the market's reaction to the first major salvo. However, if we look at the answers sent to the survey, these expected levels remain below the inflation expectations and point to the continuation of the monetary policy based on negative real interest rates.

At the June 22 meeting, we expect the one-week repo rate to be increased by 1150 basis points to 20%. In addition to initiating the tightening cycle of the central bank, we also think that in the last 2 years, it will begin to ease a number of complex regulations and practices that regulate the credit mechanism and liraization.

Money Markets Expect a Sharp Increase… Source: CBRT, Bloomberg, Dinamik Yatırım

While the 2023 GDP expectation was 3.8% (May: 3.7%), the 2024 GDP growth forecast was 4.5% (May: 4.6%).

Current account deficit expectations for 2023 will be 40.3 billion dollars (May: 38.4 billion dollars); It is projected to be 27 billion dollars (May: 26.1 billion dollars) for 2024. The increase in current account deficit expectations continues. In the upcoming period, a currency that will move more comfortably with the relaxation of interventions on TL may narrow the foreign trade deficit.

Exchange rate expectations for the end of 2023 were 26.18 (May: 23.09). We see that the exchange rate expectations for the next 12 months are 28.99.

Kaynak: Dinamik Yatırım-Enver Erkan

Hibya Haber Ajansı